Financial markets are being strained by the novel coronavirus outbreak all over the world. In Korea, the total amount of corporate bonds, which are due next month, have surpassed a record-breaking 6.5 trillion won ($5.26 billion). Funds placed in high-risk, high-return investments have now been moved to the low-risk, low-return investments, causing a major crisis for the companies in the high-risk group.
The situation facing Doosan Heavy Industries & Construction represents such a case. For DHI, 1 trillion won of corporate bonds are to mature by May. However, DHI’s total market value as of late March 2020 stands only at 800 billion won, and its loans also amount to over 3 trillion won.
Unlike major airlines, DHI’s crisis seems relatively unrelated to the coronavirus; the outbreak coincidentally happened during a financially precarious period for the company. The crisis faced by DHI, rather, is the result of several factors: the changing energy market, and Korea’s complacent energy policies, which ignored such changes; Kepco, which failed to maintain its competitive edge in a monopolistic market; and DHI, which continued to operate its businesses in this environment.
About 60 to 80 percent of DHI’s revenue comes from its overseas coal power plants. DHI’s overseas coal power project pipeline has rapidly declined in the past five years. This is not due to the stagnation of the energy market, as power plants are still being constructed -- just not coal and nuclear plants. The real reason for this change lies with the changing energy market trend. In the past 10 years, the cost of renewable energy decreased to one-tenth of what it used to be, causing most energy companies to favor solar and renewable energy. It is already cheaper to generate electricity from new renewables than from new coal plants in all major markets, including the US, EU, Australia, Japan, Vietnam and Indonesia. Over half of all coal plants operating today cost more to run than building new renewables.
DHI belately entered the gas power market by developing its own gas turbine technology. Unfortunately, the gas power market is declining as well. Even this technology will be commercially available only in 2022. According to the IEA, financial investment decisions for gas power have decreased for the third consecutive year, and by nearly 15 percent in 2018.
Some may say that DHI’s crisis is caused by the nuclear phase-out policies under this administration. While this sentiment is not entirely untrue, there is also something to be said about the preferential treatment DHI has enjoyed under this administration. The company was only able to proceed with the Nghi Son 2 coal power plant project in Vietnam due to support from the public financial institutions. Although President Moon Jae-in promised to reconsider the seven new coal power projects during his presidential run, he eventually allowed the projects to continue, and provided substantial coal power equipment business opportunities for DHI.
My understanding of Samsung is that “In Samsung, subsidized business is not considered a real business.” In other words, businesses’ success based purely on skill and commercial competitiveness is always more valued than success based on government support. It makes me wonder if any of DHI’s business -- be it coal, nuclear or gas -- is independent from governmental support. I also wonder if this is one of the key reasons these two companies are in such different places at this moment.
Under the coronavirus outbreak, everyone is having a difficult time. The Korean government is trying to mitigate that damage by using its limited public funds. This type of financial support should only be available to businesses that are experiencing temporary strain due to the outbreak, despite sound fundamentals. However, if, in the midst of this situation, public funds are invested into DHI’s coal power business, it will be no more than a pardon for poor business decisions, at the expense of other more deserving companies. The Korean government has valuable experience from the financial crisis in the late 1990s, and I have hope that it will make the right decision in this particular moment.
Matthew Gray is managing director and co-head of Carbon Tracker Initiative. -- Ed.